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Frankel v. Sardis

June 15, 2010


Petitioner appeals from a judgment of the Supreme Court, New York County (Emily Jane Goodman, J.), entered July 22, 2009, to the extent appealed from, confirming arbitration awards against her and respondent Lehman Brothers in favor of respondents Jeffrey Sardis, Lauren Sardis and JAS Holding in the principal sums of $600,000, $600,000 and $1,300,000, respectively, and dismissing this proceeding to modify the awards as to joint and several liability.

The opinion of the court was delivered by: Renwick, J.

Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.

This opinion is uncorrected and subject to revision before publication in the Official Reports.

David B. Saxe, J.P., James M. Catterson, Dianne T. Renwick, Rosalyn H. Richter, Sheila Abdus-Salaam, JJ.


Petitioner, a stock trader, commenced this Article 75 proceeding to challenge an award rendered against her by the Financial Service Regulatory Authority (FINRA), after a protracted arbitration proceeding. Petitioner claims that the arbitrators ruled on a matter not submitted to them by finding her jointly and severally liable with her former employer. Respondent investors crossed-moved to confirm the award. Supreme Court denied the petition and confirmed the award, finding petitioner had not demonstrated that the arbitration panel exceeded the scope of its authority.

Petitioner was a technology-oriented trader for Goldman Sachs from 1994 to 2000. In 1999, the Sardis respondents and a related holding corporation, JAS, invested about $19 million with her. Petitioner left Goldman Sachs and went to Lehman Brothers in 2000, and these investors followed her. In May 2004, however, the investors commenced an arbitration before FINRA's predecessor, NASD, against petitioner, Goldman Sachs and Lehman Brothers. In a 44-page statement of claim, the investors detailed the wrongs allegedly committed against them by petitioner and the investment firms. In essence, the investors claimed they lost approximately $9.6 million through fraudulent "churning" activities undertaken by petitioner, in which the firms were complicit.

Churning refers to the excessive buying and selling of securities in an account by a broker, for the purpose of generating commissions and without regard to the client's investment objectives. For churning to occur, the broker must exercise control over the investment decisions in the account, either through a formal written discretionary agreement or otherwise. In this case, the investors claimed that petitioner used, among other things, "false representations and fraudulent charts purporting to show the outstanding past performances of her customers' accounts," to obtain complete discretionary control over them. Then, in contravention of her customers' investment objectives, petitioner allegedly "overtraded on high margin, charging [improperly] high commissions, markups/markdowns and other costs."

The investors sought to hold Goldman Sachs and Lehman Brothers vicariously liable for petitioner's negligent and fraudulent activities, as well as for the firms' own acts of negligence because their supervisors "had to know she was engaged in improper activity which they failed to properly supervise and curtail." Thirty-seven hearings were held over a period of two years. Substantial evidence was offered to indicate petitioner's alleged wrongdoing while employed by both firms, including, as applicable here, acts that occurred while working for Lehman Brothers. The panel found Goldman Sachs and petitioner jointly and severally liable for $1 million in compensatory damages, and Lehman Brothers and petitioner jointly and severally liable for $2.5 million in compensatory damages.

Petitioner commenced this proceeding in November 2008 to modify or vacate the award. The investors opposed the petition and cross-moved to confirm the award. Petitioner contended that the panel's finding of joint and several liability with Lehman Brothers should be vacated because the investors never sought such recovery in their statement of claim. Specifically, petitioner refers to the "damages" clause in which the investors sought various categories of money damages "against Goldman Sachs and Frankel, jointly and severally." In the next paragraph, respondents delineated several categories of loss "against Lehman Brothers." There was no demand in the damages clause for joint and several recovery against petitioner and Lehman Brothers, as there was against petitioner and Goldman Sachs.

The investors countered that petitioner's misfeasance while employed at Lehman Brothers was outlined in the demand for arbitration and was forcefully explored throughout the hearings, so all parties were well aware that petitioner would be implicated in any liability found against Lehman Brothers. Supreme Court found that even though the issue of joint and several liability with Lehman Brothers was not initially pleaded in the damages clause, the issue was fully argued and defended by petitioner, who was aware from the outset that she was a target in the arbitration. It thus found that the arbitrators had not exceeded their authority, denied the petition to vacate or modify, granted the cross motion to confirm, and dismissed the proceeding. Petitioner appeals.

It is a bedrock principle of arbitration law that the scope of judicial review of an arbitration proceeding (see CPLR 7511[b], [c]) is extremely limited (see Matter of Silverman [Benmor Coats], 61 NY2d 299 [1984]; Azrielant v Azrielant, 301 AD2d 269 [2002], lv denied 99 NY2d 509 [2003]). Indeed, "[c]courts are reluctant to disturb the decisions of arbitrators lest the value of this method of resolving controversies be undermined" (Matter of Goldfinger v Lisker, 68 NY2d 225, 230 [1986]; see also Kern v Krackow, 309 AD2d 650 [2003], lv denied 1 NY3d 505 [2004] [judicial intervention would contravene strong public policy of this State in favor of resolving disputes in arbitration as a means of conserving scarce judicial resources]). Accordingly, an award will not be overturned "unless it is violative of a strong public policy, or is totally irrational, or exceeds a specifically enumerated limitation on [the arbitrator's] power" (Silverman, 61 NY2d at 308; Matter of Board of Educ. of Dover Union Free School Dist. v Dover-Wingdale Teachers' Assn., 61 NY2d 913 [1984]).

The only ground advanced to overturn the award here is that the arbitration panel exceeded its authority by finding petitioner jointly and severally liable with her former employer Lehman Brothers*fn1. Because arbitration is a creature of contract, the question of whether the panel exceeded its authority "focuses on whether the arbitrators had the power, based on the parties' submissions or the arbitration agreement, to reach a certain issue, not whether the arbitrators correctly decided that issue" (DiRussa v Dean Witter Reynolds Inc., 121 F3d 818, 824 [2d Cir 1997], cert denied 522 US 1049 [1998]; see also Integrated Sales v Maxell Corp. of Am., 94 AD2d 221, 224 [1983]). The arbitrators' interpretation of the issues and the scope of their authority is accorded substantial deference, and courts will not overturn that decision unless there is absolutely no justification for it (see Matter of Roffler v Spear, Leeds & Kellogg, 13 AD3d 308, 310-311 [2004]; United Transp. Union Local 1589 v Suburban Tr. Corp., 51 F3d 376, 379 [3d Cir 1995]). Therefore, the party seeking to upset an arbitration award bears a heavy burden (see Lehman Bros., Inc. v Cox, 10 NY3d 743 [2008]; North Syracuse Cent. School Dist. v North Syracuse Educ. Assn., 45 NY2d 195, 200 [1978]).

We find that petitioner has failed to meet this heavy burden. As noted above, petitioner argues that the scope of the arbitrators' power was limited by the damage clause of the statement of claim. To be sure, such clause, if viewed in isolation, creates confusion as to whether respondents were seeking damages against petitioner jointly and severally with Lehman Brothers, as there was no paragraph in that clause for ...

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